Insider Trading Explained
My Definition.
Insider “trading” or Insider “dealing” is the possession of certain advance knowledge about an event not commonly available that allows one to unfairly or illegally profit from that event. It is often specifically associated with financial markets.
Examples
A well quoted example happened 200 years ago, when Rothschilds Bank had advance knowledge of the outcome of the Battle of Waterloo thanks to their investment in new technology – the Telegraph – and they proceeded to profit hugely from the rise in stock prices that occurred once Wellington’s victory was common knowledge.
Was this a crime, or just good business?
Another couple of examples of Insider Trading are featured in two of my favourite films from the 1980s – the comedy Trading Places and the drama Wall Street.
In “Trading Places” the bad guys are a couple of brothers running a Commodities Brokerage, and they rely on making their fortune by illlegally obtaining advance knowledge of production figures affecting Orange Juice Futures.
The film Wall Street is primarily about stock price manipulation, arising from “inside knowledge”. Another great film is “A Good Year” with Russell Crowe. In the first few scenes of the film, Russell Crowe’s team of salesmen (or traders or dealers) demonstrate exactly how stock price manipulation works.
Of course, advance knowledge of events does not always only profit one party – for example today’s weather satellites can provide early warning of major storm systems that often saves thousands of lives.
Insider Trading is prevalent in all industries and business in one form or another – sometimes in an obvious way and other times more surreptitiously. The Domain Name Industry as an example, is controlled by a number of large institutions. Where a valuable domain name is being sought by a large company, and one individual or business has prior knowledge of this, that domain name can be safely acquired in the knowledge that a guaranteed profit will arise.
Can Insider Trading Be Prevented?
Absolutely not: everyone wants to be “ahead of the game” especially in Business. Where it could apply in financial trading, techniques to protect firms and individuals from this potential claim have only become more and more sophisticated and so it is much harder to prove.